Scorpio Tankers Inc (STNG) 2014 Q3 法說會逐字稿

Hello and welcome to the Scorpio Tankers Inc. third-quarter 2014 conference call. Today's conference is being recorded. I would now like to turn the call over to Brian Lee, Chief Financial Officer. Please go ahead, sir.

Thank you, everyone, for joining us today. On the call with me are Emanuele Lauro, Chief Executive Officer, Robert Bugbee, President, and Cameron Mackey, Chief Operating Officer. The information discussed in this call is based on information as of today, October 27, 2014 and may contain forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings press release that we issued today as well as Scorpio Tankers' SEC filings which are available at ScorpioTankers.com.

Call participants are advised of the audio of this conference call is being broadcast live on the web and is also being recorded for playback purposes. An archive of the webcast will be made available on the Investor Relations page of our website for approximately 14 days.

I'd now like to introduce Emanuele Lauro.

Thank you, Brian, and thanks to everybody for joining us today. Before I pass the word to Robert, I'd like to share a few thoughts with you.

At present, Scorpio Tankers operates a fleet of 46 fully owned tankers and has an additional 29 vessels, new building vessels, which are expected to deliver throughout the fourth quarter of this year and the first two quarters of 2015.

Our focus in the last months has been on execution. We are focused on executing the strategy which has been shared throughout with our shareholders and our lenders. Over the summer, we finally turned the corner of having more ships on the water than vessels under construction at shipyards. We seem very confident in improving product tanker markets and we are experiencing this as we speak with a considerable strengthening across all of the product tanker asset classes.

The arbitrages of gasoline and fuel oil from Europe to the US are currently open and has pushed and moderated in the Atlantic higher. At the same time, longer-range vessels that are moving west to east with naphtha have cleared the way for the medium-range remaining in the Atlantic. We are at the beginning of what could be a strong winter season for product tankers and we believe the Company is extremely well positioned to take advantage of it.

We still have a lot of work to do in taking deliveries of the rest of the fleet, and ensuring that the best possible professionals are going on board to look after our modern fleet. And we look forward to June 15 taking delivery of our last new building.

We are open of course to answer any questions you may have today, and keeping you updated with the developments of the Company in the next weeks and months. And with this, Robert, the floor is yours.

Thanks Emanuele. Thanks everybody. We know it's a great environment out there for many of the shareholders. But I'd like to clear up one thing first. We intentionally omitted any discussion on the dividend in our press announcement. It's certainly not management's intention to give the wrong impression that we would cap the dividend. Simply, we haven't met on this. We would not expect the dividend, once we finally determine what it's going to be, to be less than the $0.10 that we are currently on. We ourselves are just in very changing times and deciding what is the best use of capital with these new improved cash flows.

Emanuele is really correct in that we are focusing on the execution, the execution of delivering this fleet, and the Company is changing very fast. For example, in the fourth quarter, we would expect to have over 1,500 extra revenue days as a result -- compared to the third quarter as a result of these vessel deliveries.

We intend to continue to maintain a strong and liquid balance sheet. And we intend to put ourselves, keep ourselves like we've shown in the third quarter where we are able to not just be in a position to buy back stock, to also increase dividends, but also to acquire, like we did in the third quarter, accretive assets that are accretive promptly vessels that are delivering to us let's say within three, four months.

I'd like, if possible, if we could keep the questions which are going to go to the modeling part of the questions as off-line to Brian as possible. And I would love to hear the bear case. Bear case questions would be fantastic. We have felt the Company has always said that we believe 2015 is going to be the real year when the majority of our fleet is delivered, and we are seeing the fundamentals play out; we are seeing them finally play out through. And there's really nothing much more for us to say at this stage than give our thanks again, and we'll open it up to question straight away.

Thank you. (Operator Instructions). Ben Nolan, Stifel.

Great, thanks. I'll have to think of a bear case question in just a second. But my first question I guess for you guys is obviously we've seen, like you said, we've seen the ARB windows open and rates are higher, even today they are higher. How much of the recent improvement in rates would you sort of categorize as just sort of a shorter-term ARB opportunity versus something that is more fundamental in terms of the long-term growth of the business, and that exceeding the available supply in the market?

I think the way with that we look at this is you've seen steadily compound improvements. If you look at the Baltic tanker, Baltic clean tanker index, you've seen an improvement, steady improvement, all the way from July, really led to begin with from the LR2. And it's only really been in the recent four or five weeks that has moved from a steady improvement of a 45-degree angle into the parabolic position that we have now. So that tells us really it's down to the fundamentals, because you can't have a market that has such a broad-based demand across all sectors, all geographical areas, all sizes in the product market. But it's originally led by the bigger ship in the food chain, the LR2, without it being fundamentally demand-driven.

Now that demand is being driven by two factors that we are seeing for the first time really for many years, seven, eight years or so, the Asian demand there, a strong fundamental Asian demand. And that is a result of not just the economic growth but Australia switching from crude imports to more product imports. You're even seeing China now, as its refinery complex develops, China is becoming short gasoline, long diesel. You're seeing a normalization of the vegetable, the ancillary trades like vegetable oils and palm oils.

And most important, you have the catalysts, the catalysts that came in four or five months ago, the some things disappointed us because it's taken them so long to come up the preceding two years. Finally though, that Jebel Ali refinery came up. Now, going forward, you've got thus strong consistent demand combined with the change in the refinery situation, increased refineries, Yanbu coming up, India expansion of a month, and the fundamentals are taking over.

So yes, of course, you just had a little bit of a catalyst thrown on top because you've got oil price down, the derivatives of products down. That's stimulating demand, the volatility stimulating the arbitrage at this present time combined with the aspect of having interest rates lower for longer. But right now, what we are seeing in oil, this could turn out to be very similar to 1985 for the broad tanker market. It is very positive for crude and product.

Okay. So I guess my next question is, at least recently, we have seen the products outperforming the crude a little bit. I think maybe one of the more bear case scenarios is that what if OPEC cuts oil production or something like that which would be somewhat bearish for the crude market? Can the product market decouple do you think from the crude market?

The product market has decoupled in the last months from the crude market. But I think the crude oil market -- this could really catch light here. There's no reason at the moment, and we don't have a vested interest in the crude now that we've sold our tankers out. But the crude market itself is looking not just on a seasonal basis but on a demand basis bearing in mind is fleet has been static as if that thing could start moving hard any minute.

But in the bear case scenario of an OPEC cut, that actually has to be enforced, right? It's not one where they just say hey, we are cutting 500,000. The product market will still have changed fundamentally to any historical point because those same Arab countries, those same Arab areas are now having the refineries for export coming up online, so you would still see a better ratio of products to crude earnings than you've ever had before, even in that scenario.

Okay, that's helpful. And then my last question is just seeing what you're thinking with respect to your Dorian position. I know originally it said that you had expected to be out of that by the end of the year. Is that still the case, or how are you thinking about that position?

I think that the LPG market has on a year-over-year basis continued to strengthen whether in headline rate or the actual capacity for the terminals coming on. And the LPG market especially where that stock is priced at the moment, our investment base is quite constructive. We will put ourselves in position to be flexible. I mean our lock-ups come off in, all the lock-ups come off on November 7. But if you were looking at it on a technical basis, we are much better buyers of that stock than we are a seller of that stock at the moment. And we don't need it to fulfill -- we don't need the liquidity of that stock as important as sales to fulfill our strategic objectives of the moment, the same as we've already shown in 3Q.

Okay, perfect. I'll turn it over to somebody else.

Jon Chappell, Evercore.

Thanks. Robert or Brian, I wanted to follow up on that liquidity comment you just made. It looks like your available credit facilities will cover the remainder of your CapEx. Your cash on the balance sheet could cover the remainder of your buyback program. So as it relates to any additional growth, dividend, etc., are you just kind of viewing cash flow from operations as the go-forward liquidity? I guess you have had a couple more vessel asset sales. Could you speak to maybe the timing of those as well?

I'll take that and you can take the details off-line. But the actual liquidity of the Company, what you think today is not necessarily just what it is. The other facilities in the Company have such a strong balance sheet that the other facilities -- you could look at that include working cap positions. You actually have, once those lock-ups come off on the seventh in Dorian, that thing is leveraged on margins etc., etc. But you're correct in saying, in terms of the operating cash position, this is part of our quandary at the moment because despite the fact that we have been clearly bullish -- you can see from our list of time charter ends that we did in the first quarter, the acquisition of the vessel stop buyback, this company -- I'm not saying these rates would be repeated, but if you took the rates as they were Friday across the market, this company has moved from something like $0.00 a share in earnings to somewhere around $0.025 a week in earnings related to the spot market. So that's where we are seeing overall liquidity here, plus the access that the Company has to for example the baby bond market, etc., like that. So we are confident amongst all the different weapons we have that we can continue the strategy that we've got.

And on the time chartering strategy, I thought the plan originally was, as you took more delivery of your new builds, you would start to layer out a little bit the time chartering strategy. So how do you kind of weigh your bullishness on the market today versus the delivery of your new fleet being completed in eight months?

Well, I think the only way you can say it is we clearly got more constructive as we -- as we felt that this capital was coming up over the summer. And as you can see the actual rates that we have either extended of those charters or entered charters on, we simply said look, the commercial business opportunity is so, we think is so big, and the weighted risk going into your stronger season is so high in favor of doing these that we decided fine, we will just extend those charters.

Okay, but do you expect to continue to add more, not maybe just extending but as also adding new tonnage (multiple speakers)?

I think you're done. The market is moved. It's gone. You've got a complete, very widespread bid to offer on the charter market. As you can see, most of the things that we did were extensions. We got very lucky in the time charter, that modern vessel, they are not there. They are not there at those value points any longer.

Right, okay. One last strategy one and then I'll let other people ask about the market. Just on the dividend for this upcoming quarter, I assume you already had your board meeting, so when do you anticipate the timing of an announcement on the dividend and will it be paid in calendar 2014 or will it carry over into next year?

One other dividend will be paid in calendar 2014 and the board has not had its formal meeting on the dividend. And as we said, we will evaluate that depending on our information over the next two to three weeks. We've been locked out. Would we have like to buy more stock down at these levels? Of course we would have done. We, despite our attempt to do an early press release, we have been pretty well locked out of buying stock in the Company. First off, we were locked out earlier because of volume weighted positions. Now the volume -- when the volume creeped up, we then started getting locked out for whatever other reasons related to announcements in earnings.

But to give you some idea we now have the capacity to when come out of lock-up we could buy 1 million shares. We don't know really a couple of things over the next two, three weeks. We believe that this market can be sustained, not necessarily and has upwards intentity, but in its fundamental change to where it was in the third quarter. But we don't know. We haven't got a clue what the stock price will be at the end of 24 hours. So the board chose simply to use its ability to wait. And even if we made an announcement on that in two or three weeks, we would still have ample time to pay that dividend within this year, around about December 10 to December 14.

Understood. Then just one more clarification on something you said on the different periods of lock-up. The press release says you've acquired $67.5 million of your own stock since July 28. Has there been any since the end of third quarter, or have you effectively been locked out for the month of October?

No, we commenced to buy 2. -- are we allowed to say? Okay, we made about 2.641 million shares at $7.69 through October.

That amount that remains includes this 2.6 million bought in October.

Got it.

But I think what you can see is what we turn out with now is -- the plus for let's say -- obviously we would like to buy that stock. But the plus is that you've got a balance sheet there in a positive cash environment that really could go either way here.

Thanks for your help, Robert.

(technical difficulty) Morgan Stanley.

Good morning guys and thank you for the update. You talked a bit about -- I mean spot rates have obviously come up quite a bit and you talked about how the bid ask on the time charter is quite wide. When do you expect the time charter rates to come up more substantially, and seeing that's a fundamental shift, I guess you would have to expect those to come up soon. Have you seen any deals being done at higher levels, or is that something that is not related?

You've started to see higher deals already in year lock two. It's a little bit difficult in the MRs because, first of all, charters are pretty reluctant now to go in and take Monaco ships right into the face of all the environmental changes coming in January. Secondly, there's really not even an offer on the eco-ships because anybody who has got a prompt eco-ship is -- the spot is pretty well a strong player because some of the weaker ones might be six to nine months, one year charter, they aren't even a year on eco's, but what is left is the people who have had ships being delivers are the Shells, the Vitols, the Valeros and the Paths, none of which are interested in even quoting for charters at the moment. And then the velocity of the movement so far in the -- let's say there will always be a couple people, traders, who are willing to take the Monaco MRs and a couple of ones are willing to do it -- when you can fix US Gulf to carriage and back again, you will not eco-ship in the 20s, where is the bid offer when the last damn one year charter was somewhere around [$13750].

(multiple speakers)

Yes, so that's quite a substantial shift, but it's going to take a little time for people to do it. The same with asset prices. I think it's absurd to look at a company like Scorpio Tankers on NAV. But if you think about what's going on on asset values, is that most people have in their figures the asset values that were done in the rock bottom of the markets in June, July and across August. We could pretty well guarantee that right now as we are speaking, asset values are firming, but certainly firming from the profit side, and they will firm from the bid side as people start getting cash flow. So it's like what happens in these companies if you suddenly get a 5% increase in gross assets combined by positive cash flows. You will just have to wait, but underlying you can pretty well guarantee the bids and offers are wide but moving upwards whether or not it's in time charters or in asset value.

Have you seen any higher asset value transactions yet or again did that (multiple speakers)

Yes, but I can't tell you about it.

Oh, okay, you can't tell us.

That's what I'm saying. What I'm saying is the physical market is responding pretty well because this product market hasn't just been strengthening last week. This has been going on since July. And if you look at the supply side, nobody has ordered any product tankers really in the last six months. And supply side, it's great news. The supply side, all these newbuildings in the shipyard are getting delayed and delayed and delayed and delayed. We ourselves -- you don't see it in our earnings releases or our deliveries because we gave you all such conservative delivery times, but internally we are getting delivered ships between six and eight weeks late sometimes. And we are in front of the traffic jam. So imagine what it's like if you were at the back of the traffic jam. I mean you saw navigated products get a six, seven month delay out of China. Maybe it's only six or seven months, maybe they get the ships. Who knows? But between the first-class shipyards in Korea delivering late and the Chinese still not decided, the supply side is much less coming in than what the market appears.

Okay. Thank you very much Robert. That was it for me.

Herman Hildan, RS Platou.

Good afternoon guys. So, I guess like you have been going into the back of the business, so the last I think six, seven quarters you've been raising your dividends by $0.01 or so per quarter. Since you're now --

I think you should try a different question, because I think I have said all I can really say on the dividend. Shareholders should be happy that they've got a company with rising cash flows, that they are not going to get really less than the $0.10. And if you are short and you're trying to work out, you borrow hard luck.

And the question was more kind of whether we should expect the significant increase (multiple speakers)

(technical difficulty) the board is (technical difficulty).

Well I guess the second question I have which we briefly touched on before, could you give some insight into how the market behaved during the time where prices were falling significantly?

The last time, and unfortunately the present generation if we go back to the 2000s or before that, we got very used to a pretty highly correlated link between crude oil prices, product rates and crude oil tanker rates. That was really because there was so much demand going on in the 2000s that you could march oil price up as a result of huge amount of demand. Then obviously you had a demand shot, good enough. But back in 1985, the people got comforted into thinking that lower prices are bad tankers, and this is crude as well as products, and high prices are good. But the last time we had a supply-led down drop in oil prices, which is really what this is. This is the Saudis and Kuwaitis reminding the world that they are important too. That this happened in 1985. And at that time, you still had somewhere between 65% and 70% of the crude oil tanker fleet laid up in a few of the off-Greek islands. And the Saudis took oil price down by saying we wanted to send more market share. And that was such a huge stimulus to just basic demand and to seaborne ton miles because it was the longest shipping route. And if you think about that today, I think all of us in shipping would gladly sacrifice 1 million barrels of shale oil going into those Northeast US refineries for an extra 1 million barrels of product and/or crude coming out of the Middle East.

On the demand side, my mother, who is 85, gets it straight away. Yesterday she was telling me how UK gallon of UK liter of gasoline, which equals petrol, has fallen GBP0.08 in two weeks. And the government and people are promising more falls to come. And on that basis, she took some of our friends out for a two-hour cab ride. And that's what happened. People whose heating oil bills, that feel the heating oil bills are going to come down, they will keep the temperature in their house. It's an immediate response to the consumer. But most importantly, look at a country like India, look at the repercussions going on from India or China, these importing nations, or Japan or Korea, their GDP immediately gets affected positively when you get lower commodity positions.

So you are effectively saying oil demand has picked up significantly, then that's why rates are going up as much as they are. (multiple speakers)

No, I'm not saying recently. We have said look at the charts. The fundamentals in products have led to demand increases all the way since July, since we normalized from the horrific first six months we had and the refineries come online. Going forward, not today, they are not reacting to it today at all. This will come. But over the coming weeks, months, the demand side for crude and the demand side for products is going to increase as a result of lower, more available supply of crude oil.

And when you look at the behavioral charters, do you see any maybe changes in trading (multiple speakers)

Yes. The one change that you've seen already, which is also a very nice thing, is that charters are already trying to work ships further out. So instead of just working prompt, they are willing to work deep into next week in some areas of the market. That is normally a positive thing too.

The Vulcan charters take in. You've seen people like Glencore take in LR2s, some take in MRs. Even Morgan Stanley has been taking in MRs over the last three or four months up until two or three weeks ago when the bid offer went haywire.

Is there any way you will be willing to charter out your ship?

You're determined to keep asking that question in every follow-up, time charters.

Okay. Let's forget about that. Just the last one I guess, initially Emanuele mentioned about 28, 2014 has been a year where there's been focus on execution. Looking into 2015 and 2016, what's kind of the headline focus for the Company?

Keen execution. We are receiving the last ship in June 15, so we are very much focused on that. As Robert was saying in previous comments during the call, the way we're going to utilize the cash flow generation is to be seen in this cast and we're going at look at what to do going forward. But execution has to be still at the top of the bulk of our priorities and we will make sure it stays there for this way.

Okay, thank you very much guys.

(Operator Instructions). Noah Parquette, Canaccord.

Thanks. I just wanted your thoughts on the LR2 market. How much of call it tankers are trading dirty now, and are you seeing them starting to switch back and how do you see that playing out over the next year?

We had a lot of coated tankers move from dirty to clean in the last parts of 2013. I think that most of those vessels that are capable of doing it, modern enough to do it, have already done so. If you have a huge, persistent wide spread, then maybe you can have two, three, four, or five more. But where the Aframax market is and where we think it's going, we don't see that as a factor.

Are you worried about ships going back to the clean trade?

No, that's what I'm saying. No.

Okay, thanks.

And that does conclude the question-and-answer session. At this time, I will turn the conference back over to management for any closing remarks.

No further closing remarks. I'd just like to thank everybody for taking the time to be with us today, and look forward to speaking with you in the next days. Thanks very much.

And that does conclude today's conference. Again, thank you for your participation.